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Friday, August 26, 2011

No QE3! Oh No! Or Maybe in September?

As usual anyone trying to figure out the market reaction to Bernanke's speechtoday, ended up with a case of whiplash. For long time market watchers this goes with the territory. Overall the market was initially pretty disappointed if not traumatized that there will-for now-be no QE3.

The market originally sold off on the news. Still anyone who stood out on a limb at this point and got short ended up road kill. Playing Fed meetings or announcements is always tricky. Often the market's first reaction won't take; sometimes it can go back and forth for hours before deciding whether it is bullish or bearish on the news.

After the sell off though, the market regrouped and now looks fairly healthy at 2:44 est. So what gives?

Coming in it seemed that the narrative on The Street is that QE3 is on it's way, that Bernanke had given the signal. On this basis it seemed to me that The Street was quite misguided and was believing what it wanted to believe. Bernanke's previous statements suggested to me that he was didn't really want to go to QE3, though if things continue to get worse who knows....

"It is clear the recovery from the crisis has been much less robust than we had hoped," Federal Reserve Chairman Ben Bernanke said in prepared remarks at a banking conference in Jackson Hole, Wyo.

Bernanke said the Fed will meet for two days in September instead of the planned one to discuss its options to provide additional monetary stimulus, among other topics.

“[Bernanke] outsmarted Wall Street,” said Todd Schoenberger, managing director of LandColt Trading. “His speech was plain vanilla and his plan was not to have a plan … He basically gave us a carrot so that we can hold our breath for the next month.”

I like the way Schoenberger put it: "his plan was not to have a plan."

While it seemed like bad news that the market got ahead of itself and there was no QE3 on the other hand he didn't categorically say there won't be either.

Right now it seems to me the bleeding of the last month plus may be subsiding for the time been. Also though I unfortunately am in no position to play it, if I were gonna play anything it would be Bac calls for with Buffet's move $10 seems pretty realistic-$10 calls are pretty cheap at this point even a few months out.

I would watch for gold too. Gold is always knocked by the equity guys but it has been by far the best investment you could have made the last 10 years and has been the gift that keeps on giving. However, it had that huge sell off the other day and it seems quite plausible that it is gonna have at least a short term correction after such a big run.

Obviously this has no bearing on the long term of Gold which the last 10 years would suggest you shouldn't bet against.

But if Gold is weak that will probably mean equities will be stronger-money has to go somewhere.

If the bullish case for the economy is right-at Diary of a Republican Hater the other day I tried to make a bullish case(there is also certainly a bear case which is at least as compelling and I also have made)-then logically the market should be ready to start coming back.

Even if it isn't one would expect the short term market to be better as it sold off so much since July.

Bernanke isn't announcing that because printing more money will make things worse, not better. As a champion of the downtrodden, I am sure you don't want to see those poor souls be saddled with higher prices for necessities.

The only way out of this mess is cutting entitlements. And I mean real cuts, not just slightly slowing down the rate of growth.